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When people think of India, technology and off-shoring come to mind; but there is much more going on in the country these days. According to a report by Ernst & Young, the government has been easing regulations previously used to restrict foreign direct investment in India. In March, the government revealed a liberalized set of guidelines for FDI in real estate, essentially opening up all property sectors. At first, this new policy is expected to spur joint-venture developments between Indian and foreign developers; however, solo foreign projects should begin to pop up as outside developers gain knowledge of the Indian market, the report adds. The FDI figure is projected to hit US $15 billion this year–triple the amount of 2004–and India has surpassed Mexico as the third most preferred country for foreign investment. Rahul Rai, associate director of transaction and advisory services at Ernst & Young India, spoke to GlobeSt.com about where the real estate market has been the past 10 years and where it is headed.

GlobeSt.com: When did the IT and offshoring boom start?

Rai: The IT boom itself started in the ’90s and one of the major drivers was the Y2K problem. A lot of Indian companies specialized on finding solutions. Post 2000, that manpower became free and was competent enough to go into other areas of IT. Offshoring is also a ’90s phenomenon. It has gathered momentum since 2000 but there where a lot of developments before that, like GE setting up its center in India.

GlobeSt.com: Is the development spread across the country or centered in certain cities?

Rai: Mumbai, Calcutta, Delhi, Bangalore are leading cities. There are about six main cities and 10 others enjoying the benefit of these cities. What companies are finding is that manpower in the metropolitan cities is becoming more scarce and costlier so tech companies are going into the tier-two cities. To meet the supply requirement, or to get an adequate supply at a reasonable salary level, the companies are going to the cities that are generally 200 to 300 kilometers from metropolitan cities.

GlobeSt.com: Where do you see India in terms of real estate development over the next 10 years?

Rai: You are going to see even greater momentum in real estate development. Beside our tech boom, there are quite a few other sectors in India that are becoming globally competitive. India always did well in other sectors, like textiles, but over a period of the last five years or so India has doubled its global level of skills and capabilities in other areas like the automotive and pharmaceutical industry. And those are becoming competent and efficient. The older economic boom is spreading across all sectors. The infrastructure of the country is also getting better, and that will further contribute to implementation of manufacturing efficiencies.

GlobeSt.com: What about the other sectors?

Rai: There will also witness further momentum in the economy, and that will have an impact on real estate. The office-space demand will continue to grow but the other sectors, such as housing and retail, will also experience growth. Currently, there is a large shortfall in the housing stock. Ten years ago there was a hesitation about getting home mortgages. That feeling has now completely vanished and virtually everybody follows the mortgage route for acquiring houses. That is going to continue. More people are going to buy houses and at a lower age level, and the industry is really going to grow. It’s similar with retail. Growth in organized retail, coupled with the presence of international retailers, which can happen very soon, will also fuel the demand for commercial retail space.

GlobeSt.com: Does India have a lot of big-box stores and strip malls?

Rai: Nothing comparable to Wal-Mart. Currently, from a foreign investment point of view, the government has not allowed foreign retailers to set up operations in the country. Even retailers like Nike and Adidas have to find a partner to sell their products in the country. The government is expected to liberalize the provisions related to this and allow foreign investors to take at least 26% in retail operations.

GlobeSt.com: When do you expect that to happen?

Rai: It’s expected to happen in the next year or so. About a year ago the venture-capital guidelines were liberalized and venture-capital funds were allowed to invest in real estate. A lot of private equity real estate funds can now get themselves registered with the Security Board of India and invest in real estate. Secondly, earlier this year the government changed the laws for foreign direct investment in real estate and substantially diluted the constraints on foreign investors in quite a few asset classes, like commercial real estate. That was changed and now one of the major features that has been put forward is that the construction should be at least 50,000 sm. The government also proposed a special economic-zone bill to encourage the private sector to develop in select areas and basically push exports as well manufacturing and services. They will grant substantial exemptions to be people who develop in those zones. GlobeSt.com: Does the market see these changes as a good thing?Rai: The changes made by the government with the latest legislation have been positive, and the trend has been to make it more open. The overall economy continues to do well, and the real estate market will continue to benefit. You have situations where local financial institutions have started their own real estate funds–$200 million–to make investments in India real estate. There are a lot of positive dynamics happening in the economy and the real estate market right now.

GlobeSt.com: Do you see this positive swing extending over the next 10 years? 15?

Rai: We would say about four or five years, at least.

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